Impact of Gst
FMCG sector with a market size of $13. 1 billion is the fourth largest sector in the economy. A well established distribution network, intense competition between the organised and unorganised segments characterises the sector and makes it a unique sector. Even at the time of recession, growth in FMCG sector has not slowed down which makes it an important contributor for tax revenue. In fact, among the MNCs, their Indian arms have contributed more to parent entities than foreign counterparts because of the large market size and domestic consumption.
This is one of the reasons why the government has never provided much direct incentives or benefits to this sector. From a tax perspective, FMCG sector has been constantly contributing at the highest rate to the government kitty, more so from the perspective of indirect tax on account of its nature of taxation which is levied on consumption rather than income. In India, indirect tax has a multiple tax structure — taxes at central level such as excise, service tax and customs, and taxes at state level such as VAT and entry tax.
Impact of Gst Essay Example
Further, there are local levies like octroi. On account of various taxes, the total tax impact on FMCGs is almost 20-30% which is among the highest in the world. From time to time, the government has provided certain benefits in the form of location incentive which has been utilised by the FMCG sector. For example, excise benefit granted in the state of Himachal Pradesh and Uttarakhand has made most of the FMCG companies to locate their manufacturing facility in the hilly states.
These benefits were limited to companies that had set up their operations prior to March 31, 2010, due to which the companies were not able to expand their operations since the benefit would have not accrued to them. However, by a recent circular, the ambiguity has been cleared. Now, even expansion would be eligible for the benefit though the same would be restricted to the initial period of 10 years. This has brought a new lifeline to the FMCG sector, which would help them to expand their capacity.
In addition to these multiple taxes, the real complexity for the sector is the variance in tax rates. Excise duty rate varies from 4% to 10%, and VAT rate varies from 4% to 15%. Further, what is more worrying is that there is no consistency of VAT rate for a same product in all the states. For example, health drink is taxable at 5% in Maharashtra, while the same product is taxable at 12. 625% in Kerala. Though VAT was expected to have a unified tax rate system across the country, the same could not stand up to its expectation.
Even after almost six years of the introduction of VAT, instead of moving forward from an ill-fated sales tax regime to a coherent VAT regime, we seem to be going backwards. The states have forgotten the basic principle of having standard tax rate across the nation. Most of the states have changed the agreed VAT rate of 4%/12. 5% by either enhancing the VAT rate or toting up taxes in addition to VAT. Gujarat was the first state to increase the rate, followed by Andhra Pradesh, Haryana, New Delhi, Maharashtra and others.
Also, there are various classification disputes which have not been settled under the VAT period. For example, whether ghee, which is used by both consumer and industries, can be classified under industrial input schedule? Also, whether entry for drugs and medicines would cover even medicated goods. Some states include the same while in other states the dispute continues. There are many such instances for which there is no answer. In such a scenario, tax authorities continue to levy tax on a whim and the industry has no alternative but to litigate with a hope that at some level good sense shall prevail.
In addition to VAT and excise duty, there is Central sales tax. To trounce the CST impact, businesses have located themselves in each state, though the same was also done to get closer to customers. Presence of FMCG sector in almost all states has created other challenges in obtaining entry permit/way bill, which hampers free movement of goods. It is still difficult to answer why a country needs to have so many barriers for movement of goods. It can be understood that states want to have some checks to control tax leakages but that should not be at the cost of business.
The real reason for having check post and permits has vanished and is being misused by tax authorities. Today, in states like Uttar Pradesh, authorities are holding business at ransom for way bills. Such controls have only created hassles for the industry. It’s time we learn from global economies the way to provide freedom to businesses. For example, the European Union still does not have such complex procedures and barriers for movement of goods from one member country to another. However, a silver lining is the advent of GST.
GST promises to be the most significant initiative of independent India. GST would result in a major rationalisation and simplification of the consumption tax structure at both the Centre and state level by replacing all central and state level indirect taxes such as VAT, excise duty and service tax. GST is the most ambitious indirect tax reform in India ever attempted and aims to create one “borderless” domestic market. It will tax “consumption” against “production”, which is the current norm. GST would have immense impact on the industry, especially the FMCG sector.
GST would be a tax on transaction, which would be neutral to factors of production, business processes, business models, organisational structures, product substitutes and geographical locations. Business can function and take decision based on commercial perspective rather than tax impact. Business would have to start challenging the existing business structure and start planning whether the same needs to be continued in GST scenario, for example whether depots are required in all states, since CST would not be in existence.
It is a fact that the government has to take various steps on IT and administrative set up so that GST is implemented. There is continuous discussion on GST model, rate structure and other attributes but there are no clear answers. It is critical that industry starts identifying various areas such as classification, rates, treatment of present incentives, faith in check post to represent before the empowered committee and the government so that there is a smooth transition to GST and there is no adverse impact.
We hope that in the coming Budget, the government gives a clear direction on the implementation of GST so that air of ambiguity gets clear. Companies investing Rs 100 crore or more in plant and machinery during the period FY14 and FY15 will be entitled to deduct an investment allowance of 15% of the investment. Increase surcharge from 5% to 10% on domestic companies whose taxable income exceed Rs 10 crore. In case of foreign companies who pay a higher rate of corporate tax, surcharge to increase from 2% to 5%, if the taxable income exceeds Rs 10 crore.
Current surcharge increased from 5% to 10% on dividend distribution tax or tax on distributed income. Concessional rate of tax of 15% on dividend received by an Indian company from its foreign subsidiary proposed to continue for one more year. Removal of cascading effect of DDT in a multi-tier structure where dividend received by a domestic company from its subsidiary (which is also a domestic company) is distributed to its shareholders. Work on draft GST Constitutional amendment bill and GST law expected to be taken forward. sum of Rs 9,000 crore is set apart in the budget towards the first installment of the balance of CST compensation No change in the normal rates of 12% for excise duty and service tax. No change in the peak rate of basic customs duty of 10% for non-agricultural products. Education cess to continue at 3% No revise either the slabs or the rates of Personal Income Tax. However, relief for Tax Payers in the first bracket of Rs 2 lakh to Rs 5 lakh. A tax credit of Rs 2000 to every person with total income upto Rs 5 lakh. Surcharge of 10% percent on persons (other than companies) whose taxable income exceed Rs 1 crore to augment revenues.
Allocation of Rs 80194 crore in 2013-14 for Ministry of Rural Development marking an increase of 46%. The tax rate in case of non-resident taxpayer, in respect of income by way of royalty and fees for technical services as provided under section 115A, is proposed to be increased from 10% to 25%. This amendment will take effect from 1st April, 2014 and will, accordingly, apply in relation to the assessment year 2014-15 and subsequent assessment years. Custom Duty on specified machinery for manufacture of leather and leather goods including footwear reduced from 7. 5% to 5%.
Excise duty on cigarettes is being increased by about 18% on all cigarettes except cigarettes of length not exceeding 65 mm. Cigars and cigarillos duty is also being similarly raised. Basic customs duty on hazel nuts is being reduced from 30% to 10%. Basic customs duty on dehulled oat grain is being reduced from 30% to 15%. Export duty of 10% on de-oiled rice bran oil cake is being withdrawn Industry Expectations No hike in excise duty hike on FMCG products The rate of central excise duty on the 65 mm filter cigarette slab be reduced from the existing level of Rs 689 per thousand cigarettes to Rs 200 per thousand cigarettes.
The rates of central excise duty for the other slabs of filter cigarette be reduced, or, at the very least, no further increases in duty for these slabs. A hike in Gold import duty Existing exemptions being granted to Food Processing Industry (either in the form of Nil rate of duty / 2% rate of duty) should be continued and no new levy introduced in the forthcoming Union Budget on Food Processing industry Expects to provide some relief by reducing excise duty on Packaging materials used in the food industry – Printed Laminates, Pet Jars, Corrugated Cartons – from 12% to 6%.
Increase in allocation of resources towards NREGA and Bharat Nirman Concrete announcement regarding roll-out of GST Rural focus of the budget and direct tax relief for the middle class Budget Impact Budget imposed excise duty on cigarettes is being increased by about 18% on all cigarettes. Last year there was 21% excise duty hike in cigarette. ITC is expected to pass on this entire 18% hike to consumer. The MNC company’s subsidiaries which pay royalty and fees for technical services to their parents companies outside India will have to 25% tax on it.
A 46% rise in allocation for Ministry of Rural Development augment well for FMCG companies, as rural region contributes around 25% to 50% of total revenue to FMCG companies. Stock to watch ITC, Marico, Nestle [ Get Quote ], GSK [ Get Quote ] Consumer, Colgate Palmolive, HUL Outlook The budget was negative for the FMCG sector. There was no major announcement for the sector. There was no rise in income tax slab this time which was very essential looking at less discretionary income in hand of consumer and fall in volume of FMCG companies.
However, rise in allocation for Ministry of Rural Development augment well for FMCG companies. The budget is a negative development for the cigarette industry particularly for ITC considering that after last year’s 21% excise duty, this year also there was 18% rise. ITC is left with no choice except to pass on the hike to consumer. Volume are expected to see dip initially, before recovering. Challenges With the growth drivers in place, there are many issues and challenges the sector grapples with. The key challenges faced by FMCG sector players in.
India are as follows: Tax Structure – Complicated tax structure, high indirect tax, lack of uniformity, high octroi & entry 1. tax and changing tax policies. Infrastructural Bottlenecks – Agriculture infrastructure, power cost, transportation infrastructure and 2. cost of infrastructure. 89 India China Thailand Ta iwan US 188 210 1301 2766 0 1000 2000 3000 Exhibit IX 18 : Labour cost (US$ per month ) Labour cost (US$ per month) 18. CEIC, Morgan Stanley Research and Investment commission of India, 2008 10 Counterfeits and Pass-offs 3. Emergence of Private Labels 4. Regulatory Constraints
Price of Inputs 6. Tax Structure 1. Complicated Tax Structure – i. In India, problems are exacerbated by the complicated tax structure. There is a VAT which is to be levied at state level, there are other state taxes such as octroi and entry taxes and then centre levies excise duties and service tax. As a result, no product cost is exactly the same from one state to the next. High Indirect Tax – ii. Indirect Tax levels are quite high, especially in light of the fact that the sector provides goods meant for daily consumption. China, for instance, levies a tax of 10% 19.